Do I Need A Haircut?

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The answer to the question raised in the title of this blog depends, to a certain extent, on the person you ask.  If you ask a friend, your spouse or a stranger on the street, you can probably expect an unbiased answer.  If you ask your barber or hair stylist, you know the answer will be a resounding "Yes, you need one."   Now, let's rephrase the question.  Ask your broker "What should I do with my money?"  Odds are you will be told "You should invest it."  You should expect this answer regardless of the state of the market or the economy.

The hair care and the broker professions are both honorable; however, their practitioners need to eat and pay the rent or mortgage, just like the rest of us.  The individual investor should maintain some healthy skepticism when presented with investment opportunities by his or her investment professional.  The broker is paid for facilitating investment purchases and sales, not giving advice.  Indeed, the broker hopes that any advice given will lead to a transaction.  Bradbury K. Thurlow pointed this out in his book, Rediscovering the Wheel: Contrary Thinking & Investment Strategy, as follows:

As a commission salesman he is not being paid to express his own opinions, but to create activity in your account, which places him in an instant and recurrent conflict of interests whenever his opinion is asked for.  This does not mean that he may not have excellent opinions of his own or that his primary interest may not genuinely be your welfare -- it ought to be if the relationship is to be lasting.

The broker's services, as shown earlier, are to provide essential information (on demand), the convenience of safe keeping, and entertainment of various sorts, not the least important of which will be ego gratification.  The broker is by definition the go-between in a two sided market.  The amateur will be wise never to forget that someone of at least equal intelligence and knowledge may be on the other side of every transaction he makes.*

In his amusing book, Where Are the Customers' Yachts? or A Good Hard Look At Wall Street. Fred Schwed, Jr. recounted the following apocryphal story about an exchange between a broker and a customer in 1928:

There was at that time engaged in the bank stock business, along with an awful lot of others, a large red-necked Texan.  He had brought to his profession a booming Texas voice and a calcified conscience.  On this occasion he had just sold a customer twenty shares of Guarantee Trust Company stock at $760 a share at the moment when it could have been purchased anywhere else at $730.  The customer, the big sorehead, had just found this out and had called back with a view toward remonstrance.  The Texan cut him short.  "Suh," he boomed, "you-all don't appreciate what the policy of this firm is.  This-heah firm selects investments foh its clients not on a basis of Price, but of Value!"**

John Rothchild is a business writer who, in 1985, took a year off from his profession to learn everything he could about investments and Wall Street.  He chronicled the year in his book, A Fool and His Money, The Odyssey of an Average Investor.  He wrote about what it takes to become a stock broker.  He learned that, at that time, it took approximately four months to become a licensed stock broker.  A licensed beauty parlor operator received six months of training, and earning a plumber's license required two years of training.  Obviously, food for thought.  Rothchild attended some broker training sessions at major brokerage firms and learned that the majority of the training was devoted to sales techniques.  He concluded his exposition of the classes with the following observation:

There were hour-long classes in various aspects of stocks and bonds that I would have mentioned earlier, except inserting them as an afterthought gives you a better idea of their relative importance as against, say, sales.***

It seems apparent to me that an individual who spends time researching investment opportunities and choosing the one which meets his or her requirements does not really need a stock broker.  Purchases and sales can be made electronically through an on-line brokerage firm at a cost per transaction which is far less than that charged by the traditional brokerage house.  Indeed, an individual investor with an investment strategy who is willing to devote the time to research his or her investment options may be better off without the aid or advice of a stock broker.

* Excerpts from Rediscovering the Wheel: Contrary Thinking & Investment Strategy, Bradbury K. Thurlow, copyright ©1981, published by Fraser Publishing Company, are used by permission of the current copyright holder.

**  Excerpt from Where Are the Customer's Yachts? or A Good Hard Look At Wall Street, Fred Schwed, Jr., copyright © 1940, republished by John Wiley & Sons, Inc, pages 186-187.

*** Excerpt from A Fool and His Money, The Odyssey of an Average Investor, John Rothchild, copyright © 1988, 1997, published by John Wiley & Sons, Inc., page 153.

Comments are always welcome.